Even though we may be using our smartphone as a credit card one day, for now we're stuck with our plastic cards. And if you're working your way toward debt-free bliss, opening up a new credit card might seem like the wrong choice.
If that new card has a lower introductory interest rate, however, it would be worth applying and transferring the balance. Consolidating debt onto one low-interest card can potentially save you hundreds of dollars in interest charges. Follow these three steps to find out whether a balance transfer is right for you.
1. Create a snapshot of your current credit cards: balance, interest rate, monthly payment and annual fee.
2. Visit CreditCards.ca and click "balance transfer" on the left-hand side for low-rate alternatives to your current cards. Or, if you have a Mint.com account, you can search introductory offers on your dashboard. Write down the offer and its length of availability, the interest rate charged after the offer expires and the fee associated with transferring (generally 1 per cent of your total balance) for the three most attractive cards.
3. Visit Bankrate.com and search for "balance transfer calculator." Here, you can input your information from steps one and two to see what you'll be saving.
A zero-per-cent introductory offer is the ideal. If you owe $2,500, for example, on a credit card charging 19 per cent and pay roughly $230 a month in payments, it will take you one year to be debt-free and cost you roughly $265 in interest. If you completed a balance transfer with a zero-per-cent introductory offer for 12 months, you would be debt-free in the same time period but save yourself $265 in interest, minus the $25 fee to transfer cards.
A double-digit interest rate is more than you should be paying if you're carrying debt, and lowering your interest rate even a fraction will make a big difference to your bottom line. If you transfer cards, be sure you have a plan for when the card reverts to a higher interest rate. Either eliminate the balance or transfer the balance to a cheaper option, like an additional low-interest rate card or line of credit.
A balance transfer is a smart idea if the numbers make sense, you have a payment plan in place, and fully understand the fine print before making a switch to save.
Angela Self is one of the founders of the Smart Cookies money group. Read her weekly column on managing debt and saving money at the Globe's personal finance site.